UkrLandFarming (December 9, 2014)

The Eurobonds of UkrLandFarming (ULF) due in 2018 trade at a YTM of 37%, while the sovereign Eurobonds with the same duration trade 1,656 bps lower. We thus see significant upside in the bond’s price in the intermediate term. The company has a high share of export sales (25% of revenues). These are dollar-denominated, constituting a natural hedge to FX risks. The company also benefits from vertical integration: its operating margins tend to be higher than peers’ due to lower crop farming costs resulting from in-house production of seeds and fodder. Moreover, the company’s total debt/EBITDA ratio stands at 2.0x as of 30.06.2014, which is lower than MHP (2.7x), Kernel (3.4x), and Astarta (2.5x).

Company description

ULF is the largest agricultural holding in Ukraine with a land bank of 654,000 ha, and is also the nation’s largest eggs, milk and beef producer. The company operates in every segment, from seed production to crops cultivation and to storage and transportation. The grain operations of ULF are backed by seven grain elevators and 146 horizontal grain storage depots with a total storage capacity of 1.6 million tonnes. ULF also has top-of-the line poultry farms and egg processing plants exporting shell eggs and egg products to 33 countries globally. Moreover, ULF supplies about 8,000 customers with seeds, fertilizers, crop protection and agricultural equipment through its own diverse and fully integrated network, covering the entire country.

Key points:

Strong financials and ratios of the company will help it weather the storm. ULF’s EBITDA margin was stable at 41-42% in 2012-2013. Moreover, the company’s leverage ratio (total debt/EBITDA) was just below 2x as of 30.06.2014.

Exports constituted 25% of sales in 2013. Another 17% is naturally hedged against FX risk (crops). The company has already obtained permission to export its egg products to the EU.

Diversified business segments ensure a sound growth platform. The company’s eggs segment benefits from low grain prices as feed grain is one of the main cost components. At times of high grain prices, ULF’s farming division reaps offsetting profits. The company has plans to expand its meat processing segment.

Extensive CapEx program will help expand export sales. The company is planning to build a grain terminal in the Odessa region with a total throughput capacity of 5 million tonnes of grains and oilseeds, as well as increase its grain storage capacities to 3 million tonnes. ULF plans to expand its land bank to 1,000,000 ha in the next several years.

Risks:

Devaluation of local currency will negatively impact the company’s distribution segment, and will also drag domestic meat and egg sales down.

Low grain prices are likely to result in a decrease of ULF’s margins in 2014-2015. However, according to the latest OECD-FAO forecast, grain prices are expected to increase starting from 2016.

Exposure to Eastern Ukraine and Crimea, according to our estimates, is 5% for the crop segment, 20% for the cattle segment, and 13% for the eggs production segment. However, the occupied areas comprise only about 50% of Donetsk and Luhansk regions.

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